Artwork And Collectibles: An Introduction

Introduction

Whether it is picking up shells on the beach, picking out fine art in a gallery or picking over items at a yard sale, all of us have at one time or another felt the emotional tug of collecting.  There is something visceral in holding, seeing, and bonding with an object once dear to another, or dear to us, for the images and memories they evoke.  For some (myself included) this pleasure drives us to go beyond mere happenstance collecting and onto becoming what I am sure can be considered an icon of mental weakness:  the collector.

Collectors come in all sorts and sizes, young and old, wise and foolish.  Some are people that acquire odd pieces over time (sometimes because it is such a good price, and sometimes because the item strikes their fancy) which, as they look back on it, was the initiation of their collecting.  Others set out to achieve a goal, whether it is completing a set of china or promoting the works of an artist, where the thrill of the "chase" is as great a pleasure as the acquisition itself.  Sometimes collecting is an inherited condition, with each generation placing their imprint on the whole.

"Collection" carries the image of a museum-like setting, items in glass cases, under the glower of stern guards, that we may only approach with hands behind our backs.  But collectors working with a collection are in the thrall of a dynamic process with a constantly evolving assembly of items meant to be held, judged, and appreciated on a personal level.  The collection moves the collector, enhancing their life and the lives around them.  They talk among themselves and with others who express an interest in their collection.  In the end, they collect because they have fallen in love with an item and cannot bare to have it in the possession of another.

This joy and high of ownership transcends the individual worth of each item in the collection and adds an intangible longing to preserve the collection as a whole, not encountered in any other asset except perhaps that felt by some families towards certain parcels of real estate.  Investments such as stocks and bonds (even stock in a family business) are by their nature fungible and meant to be generic in their qualities, so that no one share of common stock is different from another share of the same company.  This is not true of art and collectibles (even such originally fungible items as coins, furniture and mass-produced toys) as each coin or toy carries a unique history, even though each was originally identical.

To an avid collector ownership, control and possession of items in the collection are of such great personal and emotional value that many of the tax-planning techniques (which involve gifting some or all of the ownership, control and possession of assets) will not work.  Since most techniques used to preserve more traditional assets, such as wealth and businesses, in a family will not achieve the client's purpose, I feel that it is useful to consider this as a separate specialty.

This Article is the first in a five-part series on handling artwork and collectibles in family offices and estate planning generally.  This article is an introduction to the work of collecting, the next will focus on issues of valuation and then we will move on to techniques and recent case law involving artwork and collectibles.  Finally we will look at recent changes in the law and trends in collecting generally.

Becoming Educated about Collecting

Collecting is, generally, the last of the truly inefficient markets.  Unlike the equity and bond markets, this market continues to be a "pickers" market and is largely unregulated as to the information that private individuals must disclose either as a buyer or as a seller.  Many is the story of a collector buying a piece at an estate sale, thrift store or similar place where their inside knowledge of the work or artist gives them an advantage over the seller.  Equally, there are sellers who have prices that are at a substantial premium to the market due to their reputation, such as those who are major collectors or experts in the field.  A piece from the collection of Israel Sachs has a greater premium at sale than the same piece not from his collection.

For the professional who is only tangentially involved in the "art world" but plans on handling art and collectibles in their wealth strategy planning, developing a basic understanding is not hard to do.  There are some relatively painless ways of becoming more conversant in the field.

Visit local and regional galleries; gallery staff can be helpful guides in your education.

Get on gallery mailing lists -- invitations to openings and special events will automatically arrive.

Visit and join your local art museums, collecting clubs and nonprofit arts and crafts centers.  Dealers, collectors, curators and appraisers sometimes give lectures on collecting as well as the history of art and its role in society.

Attend national art expos and craft fairs when possible.  For each type of collecting, there are certain Meccas, such as the spring-summer-fall eclectic Brimfield (Massachusetts) flea market and the prestigious Winter Antiques Show in New York City.  Even if you do not buy anything, it will certainly give you a crash course in the range of personalities of collectors.

Talk with art collectors to find out what they know and what they have learned through collecting.

Read art books and art history books as well as books on collecting.  You can go broke buying many of these lavishly illustrated works, but they are excellent in giving a sense of the artist or movement as a totality.

Subscribe to a few magazines focusing on art, collectibles and to auction catalogues.

Read reviews by local and national art critics, keeping in mind that reviews usually just reflect one person's opinion that will be hotly contested by at least one other critic.

Once you have educated yourself, be careful -- you may just have fallen in love with a work of art; bought it, taken it home and suddenly you are a collector!

Profiling the Collector

The Wealthy.  The wealthy collector (assets between $1 million and $25 million) is the most common serious collector.  These individuals have generally achieved wealth through saving income (either in a profession, as an employee or a business) during their lifetimes.

Focused on saving and preserving a collection, rather than on the earning power of managing the collection as an investment asset, these collectors concentrate on reducing risk rather than maximizing return in financial matters.  For the professional, what is important is to become educated on 1) how the collection was acquired, 2) how the artwork was created, and 3) other types of legacy wisdom (knowledge plus experience) concerned with handling the collection as the client ages and their children grow.  Often the collection has greater emotional value than sale value, so customizing for this client is always the highest value added.

Since this is more of an emotional than rational decision by the client, developing a workable plan is founded on trust between the planner and the client.  These clients also may be focused on reducing current costs and taxes, as well as maintaining creative and administrative control of the collection.

The Ultra Affluent.  The ultra-affluent collector ($25 million to $500 million) rarely derives wealth from saved income but rather from a single significant asset, usually a family business, from which the family has achieved outsized returns.  They are different, both as perceived members of an overclass (that are now targets of social or political criticism) and as patrons of the arts, which is sometimes entered into as a counter to the perceived overclass status.

The ultra-afluent collector is conscious that they may depend on others to develop the expertise in artwork, and so are targets for hucksters in the extremely subjective and fraud-ridden art market.  They may have a sense of financial fragility that is out of proportion to their actual financial strength due to the high profile cases of art fraud and recent prosecution in the news.  This can at times inhibit planning that manages change-induced disruptions effecting their collections, especially when it comes to divesting themselves of control and ownership of a valued collection for tax purposes.

Ultra affluent have trusted connections that they rely on to make subjective searches for advanced planning techniques and professionals in handling collections.  Expect, therefore, that the ultra affluent work with and will be referred by other professionals that might be your most direct competitors in another context, but who see the value of your relationship with them and their clients for broad, proactive, customized expertise that is of greater value to them then if they provided lesser quality services to their best clients in the tricky area of planning for collections.

Since the collector is only working with you because of the trust they have in their advisors, extreme deference must be given to those advisors and conflicts of interests must be scrupulously avoided.   Plan on including them as collaborators in any planning project, rather than having them "hands off" the client and collection to you for planning purposes.

Personality Profiles:  Because wealth allows greater individuality, the individual collector's personality is of great importance in planning for the future of the collection, and includes an understanding of the personalities of their spouses, children, in-laws and the mission of non-profits they may benefit.  These personalities and missions are combined with the client's priorities to determine how the plan interacts with each, both on the personal and professional level and the significance of the collection to them into the future.

Personalities are particularly relevant when dealing with a nonprofit that may receive some or all of the collection.  Even though the collection is driven by the individual emotions of the collector, the nonprofit is driven by a more collective mission in the community, reflecting the primacy of the executive director in operational matters and the overall strategic guidance of the board within their broad charitable purpose.  On the surface the mission may now be the same as the collector's desires, but there are almost always underlying tensions and assumptions that often are papered-over until after the deal is done.  The last thing you want is for a major collection to go to an institution, and then ninety percent of the collection to be either disposed of or never seen.  A thorough understanding of the personalities involved is critical in any successful planning.

Priorities:  Generally, wealth strategy professionals provide customized planning in four areas:  wealth enhancement, wealth transfer, asset protection and charitable gifting.  Collectors are distinguished from most other wealthy clientele in the very personal nature of the characteristics of successful planning in these four areas based on their background, education, occupation and prior relationships with professionals.

Because the emotional significance of collections magnifies the impact of these four areas of planning, collectors are exponentially more demanding than the usual client.  Not only on their advisors, but also on themselves, they're families and the eventual custodians of their collections.  The demand for emotional satisfaction from each of these drives not only the consideration of what is a success but also is the critical difference between the collector and the wealthy client.  This requires a constant proving of the net emotional value to the client, both on the social and financial worth of the planning.

Collection Preservation:  A collector usually seeks to preserve the collection from being diminished by costs, fees, and taxes while maintaining the personal and idiosyncratic style of the collection.  Planning for the collection needs to continue to satisfy their tremendous emotional need to realize outsized recognition and fame for themselves and their family (even if only in rather limited circles) as recognized experts and patrons.  Merely saving taxes is not enough to preserve the true value of the collection to the collector.

To preserve collections, customized trusts, foundations, products and services created by and offered through professionals are critical and an active network of such professionals must be established and cultivated.  The expectation is that by using customized products and services, the collector gains a significant advantage in either preservation or costs from the average wealthy client, comparable to the uniqueness of the collection.

Collection Enhancement:  Expect that the collector will continue to develop and enhance the nature and value of the collection, even in a passive appreciation by lending artwork or being a patron of an artist.  We, as advisors, cannot meet the knowledge expected of experts in each area in which our clients collect, but we can manage the manner in how change (both within and outside the family) effects the collection.

Planning requires a flexible, customized, structure for each collection to allow for intuitive change, but realizing the potential of creative ideas developed for the individuals through the relationship with other individuals or organizations interested in the collection.  Some clients know that preserving the personality and structure of a collection is a complex interaction of shared resources and interlocking support but others need to be educated in preserving a collection as situations change, requiring fostering by the individual collecting "stars" to carry on the tradition, whether through a nonprofit or within the family.

Our role in focusing only on the client family, is to coach the family team, which includes stars and the less extroverted team players supporting, and being supported by, the wealth-enhancing family/collection structure.

Conclusion

This article has been an introduction to the world of artwork and collectibles as it involves strategic wealth professionals.  My next column will be on the valuation of artwork and collectibles for planning purposes.